Posted at 1:45 PM (CST) by & filed under General Editorial.

Dear CIGAs,

What you have not done, you may well not be able to do after December 31st 2008. Act immediately.

Respectfully,
Jim

Date: 12-17-2008
Dear Valued Client,

On December 1, 2008, the Securities and Exchange Commission (SEC) approved a rule change that will eliminate the ability of Depository Trust Company (DTC) participants – including **COMPANY NAME** – to request physical certificates for securities positions participating in the Direct Registration System (DRS). This change will take effect on January 1, 2009.

Currently your account is set up to automatically generate a physical certificate each time a trade is settled. This functionality will be disabled on December 31, 2008. All security purchases in your account that settle after the December 31, 2008, will be held in your **COMPANY NAME** account, and a physical certificate will not be automatically generated. Details about the new regulations are listed below.

What you need to know:

-The DTC, the institution in which **COMPANY NAME** holds shares in electronic form, proposed the rule change in an effort to reduce the industry’s dependency on physical certificates and reduce the cost and risks associated with processing physical certificates.

-DRS is a way to electronically transfer shares into book entry form. Shares held in book entry form represent shares held on the books of the company rather than in physical certificate form or in street name with a brokerage firm. This change will only affect securities that are eligible to be transferred via DRS.

-Starting on January 1, 2009, **COMPANY NAME** will be unable to obtain physical stock certificates for securities that are participating in DRS.

-There are a small number of companies that are DRS-eligible but do not allow their shares to be transferred via the DRS system. These companies are considered DRS-eligible but not participating. The initial change effective January 1, 2009, will exclude these securities. However, effective July 1, 2009, **COMPANY NAME** will be unable to obtain physical

Posted at 1:39 PM (CST) by & filed under Jim's Mailbox.

Jim Sinclair’s Commentary

Every word is truth. Where is the OUTRAGE?

Remember Lee Iacocca, the VP at Ford credited with the birth of the Mustang, the man who rescued Chrysler Corporation from their death throes, and the owner of the famous quote ‘Lead, follow, or get out of the way’? Well, he’s back!  He has a new book, and here are some excerpts.

Lee Iacocca writes:

Am I the only guy in this country who’s fed up with what’s happening? Where the hell is our outrage? We should be screaming bloody murder. We’ve got a gang of clueless bozos steering our ship of state right over a cliff, we’ve got corporate gangsters stealing us blind, and we can’t even clean up after a hurricane much less build a hybrid car. But instead of getting mad, everyone sits around and nods their heads when the politicians say, "Stay the course."

Stay the course? You’ve got to be kidding. This is America, not the damned Titanic. I’ll give you a sound bite: Throw the bums out!

You might think I’m getting senile, that I’ve gone off my rocker, and maybe I have. But someone has to speak up. I hardly recognize this country anymore.

The most famous business leaders are not the innovators but the guys in handcuffs. While we’re fiddling in Iraq , the Middle East is burning and nobody seems to know what to do. And the press is waving ‘pom-poms’ instead of asking hard questions. That’s not the promise of the ‘ America ‘ my parents and yours traveled across the ocean for. I’ve had enough. How about you?

I’ll go a step further. You can’t call yourself a patriot if you’re not outraged. This is a fight I’m ready and willing to have.

The Biggest ‘C’ is Crisis !

Leaders are made, not born. Leadership is forged in times of crisis. It’s easy to sit there with your feet up on the desk and talk theory. Or send someone else’s kids off to war when you’ve never seen a battlefield yourself.  It’s another thing to lead when your world comes tumbling down. George Bush, Dick Chaney and who is this Bozo coming up next?  One of the most Liberal Idiots in the U.S. Senate, and he is talking about disarming America . I can’t believe the

American people aren’t seeing what he is about to do to this country. May God have mercy on us all.

On September 11, 2001, we needed a strong leader more than any other time in our history. We needed a steady hand to guide us out of the ashes. A Hell of a Mess. So here’s where we stand. We’re immersed in a bloody war with no plan for winning and no plan for leaving. We’re running the biggest deficit in the history of the country. We’re losing the manufacturing edge to Asia , while our once-great Companies are all moving offshore. We’re getting slaughtered by health care costs. Gas prices are skyrocketing, and nobody in power has a coherent energy policy.  Our schools are the worst in the world. Our borders are like sieves. The middle class is being squeezed every which way. These are times that cry  out for leadership and we are getting ready to put the most Liberal Senator in the U.S. Senate in as our next President because we want to be fair and elect someone just because of his race. We don’t have time to be fair, we need a strong leader.

But when you look around, you’ve got to ask: ‘Where have all the leaders gone?’ Where are the curious, creative communicators? Where are the people of character, courage, conviction, omnipotence, and common sense? I may be a sucker for alliteration, but I hope you get the point.

Name me a leader who has a better idea for homeland security than making us take off our shoes in airports and throw away our shampoo? We’ve spent billions of dollars building a huge new bureaucracy, and all we know how to do is react to things that have already happened.

Name me one leader who emerged from the crisis of Hurricane Katrina. Congress has yet to spend a single day evaluating the response to the hurricane, or demanding accountability for the decisions that were made in the crucial hours after the storm. Everyone’s hunkering down, fingers crossed, hoping it doesn’t happen again. Well guess what people?  We are having more floods right now.  What are we doing to help these people out?  Now, that’s just crazy. Storms happen. Deal with it. Make a plan. Figure out what you’re going to do the next time.  Why are we allowing people to build in flood plains anyway?  If you build in a flood area, expect to be flooded and deal with it. Don’t expect the Government to bail you out.

Name me an industry leader who is thinking creatively about how we can restore our competitive edge in manufacturing. All they seem to be thinking now-days is getting themselves bigger salaries and bonuses. Who would have believed that there could ever be a time when ‘The Big Three’ referred to Japanese car companies? How did this happen, and more important, what are we going to do about it? Likely nothing!

Name me a government leader who can articulate a plan for paying down the debt, or solving the energy crisis, or managing the health care problem. The silence is deafening. But these are the crises that are eating away at our country and milking the middle class dry. I have news for the gang in Congress and the Senate. We didn’t elect you to sit on your asses and do nothing and remain silent while our democracy is being hijacked and our greatness is being replaced with mediocrity. What is everybody so afraid of? That some bonehead on  Fox News will call them a name? Give me a break.  Why don’t you guys show some spine for a change?  I honestly don’t think any of you have one!

Had Enough?

Hey, I’m not trying to be the voice of gloom and doom here. I’m trying to light a fire. I’m speaking out because I have hope; I believe in America … In my lifetime I’ve had the privilege of living through some of America’s greatest moments I’ve also experienced some of our worst crises: the ‘Great Depression’, ‘World War II’, the ‘Korean War’, the ‘Kennedy Assassination’,  the ‘Vietnam War’, the 1970s oil crisis, and the struggles of recent years culminating with 9/11. If I’ve learned one thing, it’s this:

‘You don’t get anywhere by standing on the sidelines waiting for somebody else to take action. Whether it’s building a better car or building a better future for our children, we all have a role to play. That’s the challenge I’m raising in this book. It’s a call to ‘Action’ for people who, like me, believe in America . It’s not too late, but it’s getting pretty close. So let’s  shake

off the crap and go to work. Let’s tell ’em all we’ve had ‘enough.’

Posted at 12:15 PM (CST) by & filed under In The News.

RebuildEconomy

Jim Sinclair’s Commentary

When you read articles like this keep in mind who is the most powerful man on the planet. The answer is the captain of a nuclear launch submarine. He has the power to incinerate nations.

Now think about how India has two Akula type 2 nuclear missile launching (28 per ship) submarines, and Pakistan has mobile nuclear launch vehicles with very long legged missiles.

I would say that is as serious as it gets.

After having a home in India and having lived there for a total of three years in short stays I can assure when it hits the fan the police with the guns and uniforms and the lights turned off are the most dangerous people there in any situation.

India may still strike at Pakistan: US report
19 Dec 2008, 2207 hrs IST, TNN

NEW DELHI: India may have ruled out the military option against Pakistan in the aftermath of Mumbai terror attacks but the international intelligence community continues to believe that strikes in PoK and elsewhere could still happen.

Global intelligence service Stratfor, in its latest report, said, "Indian military operations against targets in Pakistan have in fact been prepared and await the signal to go forward."

It added, "These most likely would take the form of unilateral precision strikes inside Pakistan-administered Kashmir, along with special forces action on the ground in Pakistan proper."

The private sector intelligence service said that unlike the massive movements of 2002 during Operation Parakram, India’s preparations this time were more under the radar and not visible to the world at large. Its only indication was the fact that the Border Security Force (BSF) has been put on high alert on the western sector as well as the eastern sector — this paramilitary force’s main mandate would be to prevent infiltration.

"Sources have indicated to Stratfor that New Delhi is going through the diplomatic motions in order to give Pakistan the opportunity to take care of the militant problem itself — but the Indians know that Islamabad has neither the will nor the capability to address their concerns," Stratfor said.

More…

Posted at 3:11 PM (CST) by & filed under Guild Investment.

Dear CIGAs,

As you can see from the article below, Merrill Lynch shares our view about central banks sowing the seeds of inflation with their money printing. They are not concerned about deflation. They see it as only a very short term phenomena, and nothing be concerned about.

Timothy Bond who wrote this is one of the great economists on China and Asia. I have followed his work for years, and he has been correct. He says inflation is the problem not deflation. Deep interest rate cuts will continue in Asia and they will cause “deflation to be swept away by a flood of policy stimulus.” He goes on to say “In fact, we share the concern that central banks could over do it, sowing the seeds of future inflation.”

Warm regards,
Monty Guild

Hot topic: The two extremes of inflation

Asia has swapped an inflation scare for a deflation scare in the space of just a few months.

Price levels are falling almost everywhere. Four countries (China, Hong Kong, Taiwan, and Thailand) could see year-on-year deflation by early 2009.

What’s our view? We think deflation will temporarily raise its head, then be swept away by a flood of policy stimulus. In fact, we share the concern that central banks could overdo it, sowing the seeds of future inflation.

Still, deflation is the clear and present threat right now. Heading it off requires more “deep” rate cuts by Asian central banks, in our view. For this reason, we think the rally in domestic bond markets could continue through early 2009.
—TJ Bond

Asian snapshot: China—Cut 2009E GDP growth forecast to 8.0%

The global economy, especially international trade, has been hitting a wall since mid-September and will have to take several months to bottom out from this severe demand shock. For China, the world’s second-largest exporter, the sudden contraction of external demand is beyond our original expectation, and we believe it’s warranted to lower our 2009E GDP growth forecast from 8.6% to 8.0% albeit our optimistic view on the effectiveness of China’s fiscal stimulus plan.

What to watch: Singapore and Taiwan

As investors work through the next few months of data, we think they should revisit our view on the “heart attack” and the cycle. We expected terrible data in 4Q08 (this is happening), followed by a bounce-back in early 2009…and then business as usual, meaning a bread-and-butter deterioration in Asian data through mid-2009 as the fundamental slowdown continues to unfold. The December data should remain in “heart attack” mode. We believe key activity data from Singapore and Taiwan next week should further validate this thesis.

As the downturn deepens, we expect Taiwan export orders—a key lead indicator of China’s trade—to contract 15.5% y-o-y in November, following a 5.6% decline in the previous month. Separately, we project Singapore’s November industrial production to contract 14% y-o-y (down 12.6% y-o-y in October) in view of the poor trade data. This suggests another negative GDP reading for Singapore.

More…

Posted at 2:53 PM (CST) by & filed under Trader Dan Norcini.

Dear CIGAs,

News that the American automakers would gain access to the government’s political slush fund, also known in some circles as the TARP – Troubled Asset Relief Program – sent the Dollar skyward and was initially good for a pop in the US equity futures. Yes sireee – now that all those concessions have been wrung out of the unions to enable Ford, GM and Chrysler to be competitive (excuse me – my alarm clock  just went off and I woke up from my dream) – we can expect to see these companies swimming in profits once again. Right along that line Ford announced today that it was planning on bringing a line of hybrids, battery-hybrids and electric cars to production by 2012 (down here we call those things Go-Carts). Nice timing guys – gasoline prices are headed to $1.00 gallon and Detroit announces a line of battery powered cars. Yep – that should prove to be a real winner. Way to think outside the box!

While some are no doubt cheering the news and applauding the “bold and daring” political decision to back the loans that the American Automobile industry is screaming for, personally, I view it as a sad day in American capitalism. It seems to me that what we have no come down to in this nation is the rewarding of failure and mediocrity. We all know that car sales have slowed for all the entire automotive industry yet we do not see Honda or Toyota on their knees begging the political masters for money to keep them in existence in current form. I suspect that from this point forward, American industry will be spending far more money on staffing their lobbyists instead of research and development. And why shouldn’t they? It works. I should point out herein the interest of fairness that to Ford’s credit, they said that they do not need any short term financial assistance but are concerned what a possible failure of GM and Chrysler would do to them.

Perhaps after the unions have killed the goose that laid their golden egg the US auto industry can go the way of the US steel industry which also could not compete with foreign competition because of the outrageous burdens imposed upon it by the unions. I read the other day that Chrysler was going to shutter its plants for a month in order to reduce costs – yet did you know that the unionized workers will still receive a full 95% of their regular pay over that period. How would you like to get an extra month’s vacation and still get paid nearly all of your salary for sitting on your duff? And Detroit wonders why it cannot compete? Mark my words – we have not seen the last of the US automotive CEO’s begging for money from Washington. I suspect that we will also see them testifying before Congress about high medical insurance costs for their workers and the need to offload that expense onto the US taxpayers as well. My guttural response to all this is to say let’s just all go back to riding horses and a pox on their entire house.

All of these companies could go into Chapter 11 and reorganize, get out from under the ridiculous burdens imposed upon them by the unions, and begin producing vehicles that Americans are clamoring to buy and emerge meaner, leaner and stronger but in today’s climate that might mean some pain and hardship for a period of time – something which our noble statesmen in Washington cannot stomach as having occurred on their watch. Instead we get corporate welfare run amok and an unholy alliance between business and politicians. Please do not misunderstand – I want the US auto industry to succeed – but not at the cost of subsidizing stupidity.

My rant about all this is to state that if somehow this is all being viewed as Dollar friendly, such views are better likened to whistling past a graveyard in the hopes that one can convince themselves how brave and fearless that they are when in reality fear is clawing at your belly. Where does it all end? What industry will be next in line for goodies? Don’t forget we have not even taken into account some of the various states that are now officially bankrupt and are clamoring for a piece of the pie. The federal bailouts and loan guarantees might be one thing if the US were a creditor nation and possessed a large pool of savings. It has neither but is hopelessly in debt and merely compounding its predicament further by giving away money which it does not have, borrowing those sums from China. It would seem that Washington has become nothing but a cash cow milking future generations of Americans who are not yet even born for they are the ones that will be paying for this in one way or the other.

With the short-sighted ninnies forgetting the very reasons that they sold off the Dollar beginning a few days ago, gold was promptly trashed on the Comex moving further away from the $880 level and dropping until it uncovers the zone in which buyers become active. We are now probing for support so that the lines can be drawn on the chart to establish some sort of trading range. Right now it looks as if $830 is comfortable for buyers. That level corresponds precisely with the former swing high made back in November which at the time served to blunt upward momentum. To see it functioning as support is therefore encouraging as the reverse polarity effect kicks in (former resistance zones become support zones and vice versa for technical analysis purposes). Should this level be unable to hold, there is further support near the $820 level and more substantial support below that near the $805 level. Upside resistance centered around the $880 level will need to give way for gold to run to the next resistance level above that at $900.With liquidity rapidly drying up volatility should be expected to be quite high. Many traders are already gone for the holidays or will be leaving this afternoon not returning until the first of the New Year.

On the delivery front, another 36 deliveries were posted today bringing the total for December to 1.32 million ounces. Registered gold is at 2.83 million as of yesterday. Open interest in the December is moving down as the month comes to an end and of yesterday stood at 370 contracts remaining.

It should be noted that the mining shares are holding relatively well today – something which should not exactly inspire a great deal of confidence among the paper gold shorts at the Comex. The XAU in particular seems very reluctant to move much lower today. It is finding support right at its 10 day moving average. That average, the 20 day and the 40 day are all now moving solidly higher and are above the 50 day – a bullish technical picture. I would ideally like the see the XAU get back above the 100 day to put another nail in the bears’ coffin.

Crude oil continues to plummet and does indeed look like it is going to $30 as expected. The February contract has been reluctant to follow January lower as traders think that the OPEC announced production cuts might work but call me skeptical. That is one of the reasons we are seeing some weakness in gold by the way. When crude moves lower most of the rest of the commodity sector tends to move lower with it and that emboldens the gold bears and unnerves some of the weaker longs.

The Dollar bounce took it back above the 100 day moving average on the continuous daily chart but it is still well below the 50 day moving average up near the 8540. Trying to read too much into technical chart action at this time of year becomes increasingly suspect since so many firms and players are closing down positions, booking profits or taking losses and calling it quits until next year. The first full week of trading in the New Year is far more significant than what happens over the next couple of weeks mainly because the low volume and lack of liquidity exaggerates everything, both on the upside and the downside. Should the Dollar be able to muster enough year end short-covering related buying to take it back up near 84.50 – 85.00 I would expect to see sellers emerging once again.

Bonds are finally, showing a bit of weakness if a setback in price of such “dinkiness” could be considered weakness. I still marvel that anyone in their right mind would want to own long term US government debt as a “safe haven”…

Click chart to enlarge today’s action in Gold as of 12:30pm CDT with commentary from Trader Dan Norcini

December1908Gold1230pmCDT

Posted at 1:00 PM (CST) by & filed under General Editorial.

Dear CIGAs,

Yes, gold is a currency. To deny that is simply idiotic. However there are degrees of relationship that are exaggerated by the gold banks for their perma-bearish short manipulation. Today, like yesterday and all the days before, the Comex gang ripped off your gold price lollypop. Minus $22 between today and yesterday is somewhat over the top. The euro versus the US dollar is a simple equation. It is a financial value comparison between the world’s largest debtor nation’s currencies, the US dollar and a creditor group of nation’s currency, the euro. Now you understand.

Manipulation of the gold price can be stopped if delivery of 21,000 contracts are taken and moved out of the Comex warehouse. We absolutely do not seek to break the exchange, we simply wish to stop manipulation that uses your money to collect their profits.

Two of my friends reading this who we have nicknamed Dr. No and Chung Phat could, if they wished, bring an end to this tomorrow. You can in three months 100oz bar by 100 oz bar.

Jim

Posted at 12:56 PM (CST) by & filed under Jim's Mailbox.

Jim,

What a candid article! Seasons’ Greetings from Tbilisi, Georgia.

Richard

Dear Richard,

Thank you for this most interesting article.

You know most of the wonderful profits and earning of the Wall Street firms now being decorated to the tune of at least $7 trillion never really existed. These profits were derived from cartoon computer generated valuations of OTC derivatives of all kinds on almost everything borrowed or loaned.

To state it another way the earnings were total bullshit, they really never existed except in a computer. The profits that yielded these over the top salaries and bonus were via up value daisy chain Ethernet networks only.

Regards,
Jim

On Wall Street, Bonuses, Not Profits, Were Real
By LOUISE STORY

“As a result of the extraordinary growth at Merrill during my tenure as C.E.O., the board saw fit to increase my compensation each year.”
— E. Stanley O’Neal, the former chief executive of Merrill Lynch, March 2008

For Dow Kim, 2006 was a very good year. While his salary at Merrill Lynch was $350,000, his total compensation was 100 times that — $35 million.

The difference between the two amounts was his bonus, a rich reward for the robust earnings made by the traders he oversaw in Merrill’s mortgage business.

Mr. Kim’s colleagues, not only at his level, but far down the ranks, also pocketed large paychecks. In all, Merrill handed out $5 billion to $6 billion in bonuses that year. A 20-something analyst with a base salary of $130,000 collected a bonus of $250,000. And a 30-something trader with a $180,000 salary got $5 million.

But Merrill’s record earnings in 2006 — $7.5 billion — turned out to be a mirage. The company has since lost three times that amount, largely because the mortgage investments that supposedly had powered some of those profits plunged in value.

Unlike the earnings, however, the bonuses have not been reversed.

As regulators and shareholders sift through the rubble of the financial crisis, questions are being asked about what role lavish bonuses played in the debacle. Scrutiny over pay is intensifying as banks like Merrill prepare to dole out bonuses even after they have had to be propped up with billions of dollars of taxpayers’ money. While bonuses are expected to be half of what they were a year ago, some bankers could still collect millions of dollars.

Critics say bonuses never should have been so big in the first place, because they were based on ephemeral earnings. These people contend that Wall Street’s pay structure, in which bonuses are based on short-term profits, encouraged employees to act like gamblers at a casino — and let them collect their winnings while the roulette wheel was still spinning.

“Compensation was flawed top to bottom,” said Lucian A. Bebchuk, a professor at Harvard Law School and an expert on compensation. “The whole organization was responding to distorted incentives.”

Even Wall Streeters concede they were dazzled by the money. To earn bigger bonuses, many traders ignored or played down the risks they took until their bonuses were paid. Their bosses often turned a blind eye because it was in their interest as well.

“That’s a call that senior management or risk management should question, but of course their pay was tied to it too,” said Brian Lin, a former mortgage trader at Merrill Lynch.

The highest-ranking executives at four firms have agreed under pressure to go without their bonuses, including John A. Thain, who initially wanted a bonus this year since he joined Merrill Lynch as chief executive after its ill-fated mortgage bets were made. And four former executives at one hard-hit bank, UBS of Switzerland, recently volunteered to return some of the bonuses they were paid before the financial crisis. But few think others on Wall Street will follow that lead.

For now, most banks are looking forward rather than backward. Morgan Stanley and UBS are attaching new strings to bonuses, allowing them to pull back part of workers’ payouts if they turn out to have been based on illusory profits. Those policies, had they been in place in recent years, might have clawed back hundreds of millions of dollars of compensation paid out in 2006 to employees at all levels, including senior executives who are still at those banks.

A Bonus Bonanza

For Wall Street, much of this decade represented a new Gilded Age. Salaries were merely play money — a pittance compared to bonuses. Bonus season became an annual celebration of the riches to be had in the markets. That was especially so in the New York area, where nearly $1 out of every $4 that companies paid employees last year went to someone in the financial industry. Bankers celebrated with five-figure dinners, vied to outspend each other at charity auctions and spent their newfound fortunes on new homes, cars and art.

The bonanza redefined success for an entire generation. Graduates of top universities sought their fortunes in banking, rather than in careers like medicine, engineering or teaching. Wall Street worked its rookies hard, but it held out the promise of rich rewards. In college dorms, tales of 30-year-olds pulling down $5 million a year were legion.

While top executives received the biggest bonuses, what is striking is how many employees throughout the ranks took home large paychecks. On Wall Street, the first goal was to make “a buck” — a million dollars. More than 100 people in Merrill’s bond unit alone broke the million-dollar mark in 2006. Goldman Sachs paid more than $20 million apiece to more than 50 people that year, according to a person familiar with the matter. Goldman declined to comment.

Pay was tied to profit, and profit to the easy, borrowed money that could be invested in markets like mortgage securities. As the financial industry’s role in the economy grew, workers’ pay ballooned, leaping sixfold since 1975, nearly twice as much as the increase in pay for the average American worker.

“The financial services industry was in a bubble," said Mark Zandi, chief economist at Moody’s Economy.com. “The industry got a bigger share of the economic pie.”

A Money Machine

Dow Kim stepped into this milieu in the mid-1980s, fresh from the Wharton School at the University of Pennsylvania. Born in Seoul and raised there and in Singapore, Mr. Kim moved to the United States at 16 to attend Phillips Academy in Andover, Mass. A quiet workaholic in an industry of workaholics, he seemed to rise through the ranks by sheer will. After a stint trading bonds in Tokyo, he moved to New Yorkto oversee Merrill’s fixed-income business in 2001. Two years later, he became co-president.

Even as tremors began to reverberate through the housing market and his own company, Mr. Kim exuded optimism.

After several of his key deputies left the firm in the summer of 2006, he appointed a former colleague from Asia, Osman Semerci, as his deputy, and beneath Mr. Semerci he installed Dale M. Lattanzio and Douglas J. Mallach. Mr. Lattanzio promptly purchased a $5 million home, as well as oceanfront property in Mantoloking, a wealthy enclave in New Jersey, according to county records.

Merrill and the executives in this article declined to comment or say whether they would return past bonuses. Mr. Mallach did not return telephone calls.

Mr. Semerci, Mr. Lattanzio and Mr. Mallach joined Mr. Kim as Merrill entered a new phase in its mortgage buildup. That September, the bank spent $1.3 billion to buy the First Franklin Financial Corporation, a mortgage lender in California, in part so it could bundle its mortgages into lucrative bonds.

Yet Mr. Kim was growing restless. That same month, he told E. Stanley O’Neal, Merrill’s chief executive, that he was considering starting his own hedge fund. His traders were stunned. But Mr. O’Neal persuaded Mr. Kim to stay, assuring him that the future was bright for Merrill’s mortgage business, and, by extension, for Mr. Kim.

Mr. Kim stepped to the lectern on the bond trading floor and told his anxious traders that he was not going anywhere, and that business was looking up, according to four former employees who were there. The traders erupted in applause.

“No one wanted to stop this thing,” said former mortgage analyst at Merrill. “It was a machine, and we all knew it was going to be a very, very good year.”

Merrill Lynch celebrated its success even before the year was over. In November, the company hosted a three-day golf tournament at Pebble Beach, Calif.

Mr. Kim, an avid golfer, played alongside William H. Gross, a founder of Pimco, the big bond house; and Ralph R. Cioffi, who oversaw two Bear Stearns hedge funds whose subsequent collapse in 2007 would send shock waves through the financial world.

“There didn’t seem to be an end in sight,” said a person who attended the tournament.

Back in New York, Mr. Kim’s team was eagerly bundling risky home mortgages into bonds. One of the last deals they put together that year was called “Costa Bella,” or beautiful coast — a name that recallsPebble Beach. The $500 million bundle of loans, a type of investment known as a collateralized debt obligation, was managed by Mr. Gross’s Pimco.

Merrill Lynch collected about $5 million in fees for concocting Costa Bella, which included mortgages originated by First Franklin.

But Costa Bella, like so many other C.D.O.’s, was filled with loans that borrowers could not repay. Initially part of it was rated AAA, but Costa Bella is now deeply troubled. The losses on the investment far exceed the money Merrill collected for putting the deal together.

So Much for So Few

By the time Costa Bella ran into trouble, the Merrill bankers who had devised it had collected their bonuses for 2006. Mr. Kim’s fixed-income unit generated more than half of Merrill’s revenue that year, according to people with direct knowledge of the matter. As a reward, Mr. O’Neal and Mr. Kim paid nearly a third of Merrill’s $5 billion to $6 billion bonus pool to the 2,000 professionals in the division.

Mr. O’Neal himself was paid $46 million, according to Equilar, an executive compensation research firm and data provider in California. Mr. Kim received $35 million. About 57 percent of their pay was in stock, which would lose much of its value over the next two years, but even the cash portions of their bonus were generous: $18.5 million for Mr. O’Neal, and $14.5 million for Mr. Kim, according to Equilar.

Mr. Kim and his deputies were given wide discretion about how to dole out their pot of money. Mr. Semerci was among the highest earners in 2006, at more than $20 million. Below him, Mr. Mallach and Mr. Lattanzio each earned more than $10 million. They were among just over 100 people who accounted for some $500 million of the pool, according to people with direct knowledge of the matter.

After that blowout, Merrill pushed even deeper into the mortgage business, despite growing signs that the housing bubble was starting to burst. That decision proved disastrous. As the problems in the subprime mortgage market exploded into a full-blown crisis, the value of Merrill’s investments plummeted. The firm has since written down its investments by more than $54 billion, selling some of them for pennies on the dollar. (This is more than Madoff’s initial loss estimate).

More…

Posted at 12:47 PM (CST) by & filed under In The News.

Jim Sinclair’s Commentary

Quantitative easing combined with fiscal stimulation leads to the advent of the increased velocity of money. This equals lower values for the currency of the largest liquidity producer – the dollar. Confidence sunders when business activity statistics are less ebullient than the real rate of inflation. Confidence is the key as hyperinflation is a currency event, not a business event.

In Zimbabwe the price of food is doubling daily just as it did in all examples of hyper inflation.

$1 trillion is only the beginning for Obama’s fiscal stimulation.

Do you recall the low bailout estimates made when Bear blew up?

Monty Guild’s Commentary

Good call Jim. In my opinion, everything you say is exactly correct. From an economics point of view, the long term effect of these actions will be inflation.

I talk to a lot of economists. Although my Keynesian friends disagree with the inflation from money supply growth thesis, largely because it is a Monetarist viewpoint, they do admit that the current large increase in the supply of bonds could send the dollar lower. Like you and Dan, I strongly believe that the huge issuance of US bonds, and the actual printing of money to which Mr.Bernanke alluded, can only send the dollar lower. In my opinion, this will send gold and foreign currencies much higher.

Obama Team Is Seeking Stimulus Bill by New Year
By JACKIE CALMES

WASHINGTON — President-elect Barack Obama’s advisers hope to finish an economic recovery blueprint by Dec. 25 so that Democratic Congressional staff members can draft legislation by the new year, as the two branches of government try to converge on a two-year plan by late January that could total just under $1 trillion.

“The goal for completing action on this important legislation should be as close to Jan. 20 as possible,” said an e-mail message from Senate Majority Leader Harry Reid’s office to senior Senate Democratic staff members.

Some Obama advisers have sought to tamp down expectations that Mr. Obama could sign a package immediately after he is inaugurated. The opposition of some Senate Republicans and House and Senate negotiations on a final compromise could force delays into February.

Democrats familiar with the early deliberations say the preliminary price tag has grown to about $800 billion from the roughly $600 billion that House Speaker Nancy Pelosi had estimated in recent days.

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Jim Sinclair’s Commentary

These reports, like the reports on WMDs in Iraq, presages a move into Pakistan "to help" the government of Pakistan kill all the bad guys as a recent article in the Washington Post suggested.

‘ISI killing US troops in Afghanistan’
Fri, 19 Dec 2008 06:01:29 GMT

Pakistan’s powerful spy agency is working with groups that support the Taliban and are killing American troops in Afghanistan, a US report says.

“All of this suggests that the Inter-Services Intelligence (ISI) is no longer certain the coalition forces will prevail in Afghanistan and that it is using militants groups in an attempt to expand its own influence,” the report said.

The report by the bipartisan Pakistan Policy Working Group also cites the Afghan government’s allegations that ISI-supported elements that orchestrated an assassination attempt on Afghan President Hamid Karzai, and that the ISI had a role in the July 7 car bombing of Indian embassy in Kabul.

The 43-page report notes Pakistan may be the greatest challenge for US President-elect Barrack Obama.

The report came as Pakistani major media outlets said that the ISI had been cleared of any involvement in the Mumbai terrorist attacks by the US’ Federal Bureau of Investigation (FBI). According to Karachi-based Dawn, FBI agents interrogated Ajmal Kasab, the lone surviving terrorist for nine hours in Mumbai. They concluded that he was a Pakistani national but ISI was not involved.

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Jim Sinclair’s Commentary

Note how the markets took this both when announced as coming, and on its advent. I feel Obama’s fiscal stimulation will produce a general lift of the equity gang’s spirits, and a good lift to gold as the dollar is weighed down by the cost of fiscal stimulation.

Bush Approves $17.4 Billion Auto Bailout
By DAVID M. HERSZENHORN and DAVID E. SANGER
Published: December 19, 2008

WASHINGTON — President Bush announced $13.4 billion in emergency loans on Friday to prevent the collapse of General Motors and Chrysler, and another $4 billion available for the hobbled automakers in February with the entire bailout conditioned on the companies undertaking sweeping reorganizations to show that they can return to profitability.

The loans, as G.M. and Chrysler teeter on the brink of insolvency, essentially throw the companies a lifeline from the taxpayers that will keep them afloat until March 31. At that point, the Obama administration will determine if the automakers are meeting the conditions of the loans and will continue to receive government aid or must repay the loans and face bankruptcy.

The money to aid the automakers will come from the Treasury’s $700 billion financial stabilization fund and shortly after Mr. Bush’s announcement, the Treasury secretary, Henry M. Paulson Jr., who will oversee the aid to the auto industry, said Congress would need to release the second $350 billion for that program in short order.

By law, once Mr. Paulson makes a formal request, Congress has 15 days to reject it and deny the additional money. It was unclear when that request would be sent or if lawmakers who have left Washington for the holidays, would return to debate it. The administration’s handling of the program has come under sharp criticism and several lawmakers in both parties have suggested they would oppose the release of more money.

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Jim Sinclair’s Commentary

It amazes me how the obvious is always ignored as it approaches the full light of day.

Pakistan remains the world’s most serious problem.

NATO Materiel Threatened in Pakistan
Taliban Attacks on Goods for Afghanistan Mission Viewed With Growing Concern
By Candace Rondeaux and Walter Pincus
Washington Post Foreign Service
Friday, December 19, 2008; Page A23

PESHAWAR, Pakistan — A recent increase in Taliban attacks on a crucial NATO transportation route from Pakistan to Afghanistan could imperil efforts to bolster the flagging, seven-year U.S.-led military campaign in Afghanistan, U.S. and Pakistani officials say.

Attacks on NATO supply lines have become a regular occurrence in parts of northwestern Pakistan, including the country’s inhospitable tribal areas near the Afghan border. In the past two weeks, Taliban fighters have mounted at least six assaults on NATO supply depots near the Pakistani city of Peshawar, setting fire to more than 300 armored Humvees, military vehicles and other supply containers.

The attacks come as Pakistanis are increasingly calling for Western forces to stop using their territory for transport: Thousands of people rallied here Thursday to demand that the government cut off U.S. and NATO access to the main transit route.

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Fears grow over Pakistan terror resolve
By James Lamont in New Delhi
Published: December 19 2008 02:00 | Last updated: December 19 2008 02:00

Fears grew last night that Pakistan’s resolve to bring the perpetrators of the Mumbai terror attacks to justice was faltering.

The government said it had lost track of one of India’s most wanted militants following his supposed arrest only a few days ago.

Shah Mahmood Qureshi, Pakistan’s foreign minister, said Masood Azhar, the leader of Jaish-e-Mohammad, a militant group, was not under arrest, contradicting his government’s previous claim that he was in custody.

"Other people have been detained but Mr Masood Azhar is at large. We have no knowledge of his whereabouts," Mr Qureshi told reporters in Islamabad. The Pakistani defence ministry said a week ago that security forces had arrested Mr Azhar, who is suspected of launching an attack on the Indian parliament in 2001 that brought India and Pakistan to the brink of war.

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